Aerospace and defence engineering produces qualifying R&D at every tier of the supply chain, from primes to specialist component houses. The technical case is usually strong. The harder questions in this sector are contractual: on a contracted programme, who owns the claim, and how do you document classified or export-controlled work without compromising it? A profitable company keeps 14.7p to 16.2p per £1 of qualifying spend under the merged scheme, so those questions decide real money.
What counts as qualifying R&D in aerospace and defence?
Work seeking an advance through uncertainty a competent professional could not readily resolve. At concept level, that commonly includes:
- Airframe and structures work with novel materials, joining methods or weight targets beyond established practice.
- Propulsion, fuel systems and thermal management development.
- Avionics, sensors and mission systems where integration behaviour cannot be predicted from published knowledge.
- Development driven by certification standards, where meeting the standard with a new architecture or material is itself technologically uncertain.
- Manufacturing process development for tight-tolerance or low-volume aerospace parts.
Certification effort alone is not automatically R&D: where the route to compliance is understood and the work is verification, it falls outside the definition. Work that fails still qualifies — relief follows the attempt to resolve the uncertainty, not the outcome.
Two objections the Guidelines answer
The first is that every box came from a catalogue. System uncertainty results from the complexity of a system rather than from uncertainty about how its individual components behave (paragraph 29), and combining standard technologies can involve uncertainty even where the principles for their integration are well known: there will be uncertainty if a competent professional cannot readily deduce how the separate components or sub-systems should be combined to have the intended function (paragraph 30). The limit sits in the same paragraph — assembling components to an established pattern, or following routine methods for doing so, involves little or no uncertainty (paragraph 29).
The second is that an allied programme has almost certainly solved this already. Where an advance has been made or attempted but the details are not readily available, a trade secret being the example given, work to achieve it can still be an advance (paragraph 11). Classification and export control keep knowledge out of the public domain as effectively as commercial secrecy, and the test is what a competent professional could deduce from what is published.
Who claims on a contracted programme?
This is the sector’s defining question. The customer claims only where it is reasonable to assume, having regard to the terms of the contract and the surrounding circumstances, that it intended or contemplated R&D of that sort when the contract was made; otherwise the contractor claims in its own right. HMRC’s guidance adds a gloss worth knowing: the test needs a specific appreciation of what R&D will be done, not mere awareness that some will happen, and work falling substantially outside the customer’s intention cannot be R&D contracted out by it. Where a build-to-specification contract turns out to demand development nobody contemplated at signature, HMRC’s own worked examples accept the contractor claiming it.
The customer’s tax position matters too. Where the customer is an irrelievable client, the contractor claims in its own right (CTA 2009 s1053A for the merged scheme, s1042F for ERIS). A customer is an irrelievable client if it is an ineligible company — a charity, an institution of higher education, a scientific research association, a health service body, or any other body the Treasury prescribes by order (s1142) — or if it is not, in relation to the contracting out, acting in the course of a trade, profession or vocation within the charge to tax. That can preserve relief for UK contractors serving overseas customers, though every person contracting the work out has to meet the test: an overseas intermediary beneath a UK customer who can claim does not help. Where a public body sits at the top of the chain, this is the provision to work through, on that body’s own status and the capacity in which it contracts.
What qualifies and what does not?
| Activity area | Usually inside the claim | Usually outside the claim |
|---|---|---|
| Structures | Joints, layups and architectures where the fatigue, thermal or weight target cannot be met by established practice | Detail design and stress analysis applying established methods |
| Propulsion and thermal | Behaviour that cannot be predicted from published knowledge or existing models | Re-running an established test to confirm a known design margin |
| Systems integration | Combinations a competent professional cannot readily deduce the behaviour of | Assembling qualified components to an established pattern |
| Certification | Meeting a standard demands a solution the field does not already hold | Verification testing where the compliance route is understood |
| Manufacturing | Process, tooling and fixture development where the process window is unknown | Commissioning to specification; tuning within a known window |
Capital expenditure never qualifies for R&D tax relief, however advanced the machine or the rig, though it may attract R&D allowances; neither rent, rates nor patent costs qualify either way. Paragraph 14 draws the line that decides most claims here: improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology do not constitute work to resolve scientific or technological uncertainty.
Which scheme applies, and what is it worth?
Most established aerospace and defence businesses are profitable and claim the merged scheme: a 20% expenditure credit, so £100,000 of qualifying spend gives a £20,000 gross credit, netting to £15,000 at the 25% corporation tax rate, £14,700 at the 26.5% marginal rate on augmented profits between £50,000 and £250,000, and £16,200 where the 19% rate applies or the company is loss-making, subject to the PAYE cap. Newer defence-tech companies are often the ERIS profile instead. A loss-making SME whose relevant R&D expenditure is at least 30% of its total relevant expenditure receives up to 26.97p per £1. That denominator is broadly the trading costs in its accounts for the period, not just the R&D ones. Connected companies are counted on both sides of the ratio. The claim value calculator and ERIS intensity calculator work both tests. Grant funding no longer reduces relief under the current schemes; our grants page explains why.
Which costs go into the claim?
Staff costs apportioned to development time, covering test and manufacturing engineers as well as the design office. Test articles and development hardware consumed in the programme qualify as consumables where they are not sold; materials in a unit sold in the ordinary course of business fall outside. Externally provided workers and subcontracted development both enter at 65% where the provider or contractor is unconnected, and for workers only so far as their earnings are within UK PAYE and Class 1 National Insurance; connected parties are restricted instead to the lower of the payment and the other party’s own relevant expenditure. Software and cloud costs used in the R&D count.
Two restrictions bite harder here than elsewhere: for accounting periods beginning on or after 1 April 2024, subcontracted R&D qualifies only where the work is undertaken in the UK, and externally provided workers only on UK payroll — a real constraint on programmes split across international sites. The narrow exception expressly excludes the cost of the R&D activity and the availability of workers as justifications (CTA 2009 s1138A(3)(b)); overseas R&D costs works through it.
What evidence does the claim need?
This sector already produces the right material: design review packs, test plans and reports, non-conformance and concession records, trade studies recording the options rejected and why, and the configuration history showing what changed between builds. A trade study that closed an option because the data would not support it evidences an unresolved uncertainty better than any narrative written a year later.
Tie those records to a project boundary with a stated advance and uncertainty, give the apportionment a basis a reader can follow, and write the Additional Information Form, mandatory for every claim since 8 August 2023, from them rather than from memory. Classified and export-controlled work can be claimed without disclosing controlled detail: the narrative describes the uncertainty and the approach at a level cleared for release. Long programmes spanning several accounting periods need consistent project boundaries year to year, which is where HMRC enquiries tend to probe. Companies building for orbit should also see space and satellite technology.
Talk it through with a chartered adviser
LimestoneGrey is a firm of chartered tax advisers and chartered accountants specialising in R&D tax relief, regulated by ICAEW. We prepare aerospace and defence claims that are meant to be checked: costed carefully, evidenced from programme records, with enquiry support included as standard and the fee agreed before work starts. First-time claimants, and companies that have not claimed in the three years ending with the notification deadline, must notify HMRC within six months of the end of the period of account or the claim is invalid: see claim notification. HMRC checked around one in six claims in 2023-24, its latest published figure.
If your company engineers for flight or defence, we will give you a straight view on eligibility and on who owns the claim in your contract chain. Call 0330 223 4 223 or send us a message.
Sources
- Guidelines on the meaning of R&D for tax purposes — paragraphs 11, 14, 29 and 30.
- CIRD161000 — the intended-or-contemplated test and irrelievable clients; CIRD162000, worked examples; CIRD163000, the s1142 definition.
- CIRD151100 — cost and worker availability excluded under CTA 2009 s1138A(3)(b).
- Check what R&D costs you can claim — cost categories, the 65% rule, and the exclusion of capital, rent and patent costs.
- R&D tax relief: the merged scheme and enhanced R&D intensive support — the 20% credit and the ERIS conditions.